Israel's political interest is to bring the Palestinian Authority closer to statehood. However, Fayyad's statement instructing legal counsel to defend the PA from foreign litigation suggests the PA is moving in the opposite direction.
The New York Sun (24/6) reports that
Palestinian Authority Prime Minister Salam Fayyad has instructed legal counsel to fully participate in litigation aimed at suing the PA for terror attacks which took place during the Intifada.
This position suggests that the Palestinians do not consider the PA to hold diplomatic immunity enjoyed by sovereign states. While Israel traditionally claimed that the PA did not enjoy such immunity (as it did not constitute an independent state), this is the first time that the Palestinians have taken such a stance. (See Who determines whether the PA is a State: Israel's Lawyers or Politicians??)
Fayyad's statement comes against the backdrop of increasing doubts over the ability of the sides to establish a Palestinian state by the end of 2008. In addition, both 'radical' and 'moderate' Palestinians are voicing doubts as to the continued utility of the PA. The failure of negotiations may have severe consequences such as a Hamas take-over of the West Bank, the dissolution of the PA and a Palestinian inversion towards the principle of the 'Two State Solution'.
In this context, Israel's political interest lies in strengthening the PA by upgrading its status and bringing it closer to that of a sovereign state so as to anchor separation between the two sides if negotiations end in failure.
Fayyad's statement meanwhile suggests that the PA is becoming increasingly weaker.
Sources
New York Sun 6/24/08 full article.
Ha'aretz 6/11/08; full article.
Jerusalem Post 6/11/08 full article.
Ha'aretz 6/4/08 full article.